Fed hints at taper, Keynsians everywhere stunned as rates rise

I'm sure Krugman is trying to think how he'll explain this in his NYT column. For a long time now we've heard that there's no problem with more debt. After all, look at the bond market! No matter how many times those of us with a shred of intelligence have replied that this was because the Fed was the only game in town, buying up all the debt issued and keeping rates artificially low, the Krugmanites didn't believe it. "Debt doesn't matter!" they would cry.

Well, yesterday the Bearded Blunder himself indicated that rates would probably rise sometime a year from now. Furthermore, the life blood of markets everywhere - otherwise known as QE - is about to be pulled back slightly (and only slightly). But apparently this was enough to send a shockwave through the markets. Debt doesn't matter, indeed. An interesting blog article, from Mish:

Federal Reserve Chairman Ben S. Bernanke said the central bank may start reducing bond purchases later this year and end them in mid-2014 if the economy continues to improve as the central bank forecasts.

âIf the incoming data are broadly consistent with this forecast, the committee currently anticipates that it would be appropriate to moderate the pace of purchases later this year,â Bernanke said today in a press conference in Washington. âIf the subsequent data remain broadly aligned with our current expectations for the economy, we will continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around mid-year.â

Bernanke stressed that the Fed has âno deterministic or fixed planâ to end asset purchases.

âIf you draw the conclusion that I just said that our policies -- that our purchases will end in the middle of next year, youâve drawn the wrong conclusion, because our purchases are tied to what happens in the economy,â he said. âIf the economy does not improve along the lines that we expect, we will provide additional support.â

The Fed repeated that it will keep buying assets âuntil the outlook for the labor market has improved substantially.â

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Over that bit of nonsensical fluff (completely expected as well as frequently repeated fluff at that), the bond and stock markets threw a hissy fit.

This is further evidence the current markets are all about liquidity and speculation and nothing about fundamentals (in case you did not realize that already).

We went from an exit strategy of selling all the bonds they've bought to a "tapering" strategy where they might , just might, buy less bonds. I seriously doubt that they will ever stop buying until it all implodes.

The twitter libs have been on a mission the last week or so to promote the theory that all the buying had and has nothing to do with the levitation of bond markets.

Krugman will never pay for this. His response will be that he's the guy to fix the crisis (that his theories have caused) and the knuckle dragging republicans are standing in the way of his grand solutions.

We went from an exit strategy of selling all the bonds they've bought to a "tapering" strategy where they might , just might, buy less bonds. I seriously doubt that they will ever stop buying until it all implodes.

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Exactly my point, you just did it far more succinctly than I did

If the Fed just whispers the word "taper" and bonds rise like this, how could they ever possibly stop QE, much less raise rates without a catastrophic rise in long term rates?

1994 redux. Markets priced in rate hikes well before the actual event. This is basic rational expectations taking place.

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This is a bit more than 1994, at least in terms of scale and difference between Fed manufactured low rates and where rates should be/should have been.

Regardless, the sole point is that Krugmanites were saying how debt didn't matter, and they would point to rates being the proof - "Look at the bond market!" they would exclaim. However, when told why the bond market was where it was (the Fed cornering the market and being front run) they would mumble to themselves incoherently and vanish from discussion.